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Mobile Messaging Market Watch: MIM vs. SMS

The use of alternative mobile instant messaging services is surging, but global volumes and revenues for traditional text messaging remain strong.

The number of messages sent using mobile devices is staggering: trillions a year globally and rising. Two types of mobile messaging services are battling for users’ thumbs and wallets: mobile instant messaging (MIM) and traditional text messaging (short messaging service or SMS). In 2014, MIM will win the battle for volume, generating over double the number of messages, but global revenues from SMS should be upwards of 50 times higher.

Mobile network operators, such as AT&T and Verizon, provide SMS using the same infrastructure that carries mobile phone calls. SMS was once the only way a mobile phone user could send a message to another person’s mobile phone. That changed with the arrival of mobile broadband and MIM apps offered by third-party providers, including startups like Line, WeChat, and WhatsApp. These services let users send messages from their smartphones via fixed or mobile broadband (an approach also known as “over the top,” or OTT). Facebook’s purchase of WhatsApp for $19 billion has drawn the business community’s attention to a fact that many teenagers and other users already knew: MIM services are rapidly gaining popularity as an alternative to SMS, but also as a substitute for email, social networks, PC-based instant messaging, phone calls and face-to-face conversations.

Deloitte predicts that MIM services will carry in excess of 50 billion messages per day this year, compared with 21 billion messages per day sent via SMS. This ratio of nearly 2.5 to 1 compares to near parity in 2012. However, SMS is expected to generate more than $100 billion globally in 2014, compared with about $2 billion from all MIM services (including value-added services offered via their platforms).

There is a simple reason for the vast gulf between revenues for SMS and MIM. “Users often incur tariffs for SMS services (up to 10 cents per message when charged individually, and up to 50 cents when roaming), or else part of most user’s monthly subscription includes a quantity or unlimited text messages. In contrast, the median cost of MIM services is typically zero,” says Paul Lee, director and head of global technology, media, and telecommunications (TMT) research, Deloitte Touche Tohmatsu Limited (DTTL). “SMS should continue to generate significantly greater revenues than MIM in the short term.” Meanwhile, MIM services should continue to capture additional volume from all other forms of communication.

MIM’s surging popularity is already extending into the workplace, where growing numbers of employees are informally using it. CIOs will also need to ensure that security and privacy protections are in place if employees use third-party MIM apps.

What’s Behind the Numbers?

“MIM services’ popularity arises, at least in part, because they can handle rapid-fire conversations among two or more parties, whereas an SMS conversation has a slight lag time and is limited to two parties,” says Lee. MIM users often rely on “presence awareness” features (which indicate someone’s availability) to know whether it is a good time to start conversing with another user—or multiple users.

Would-be users of MIM encounter some headwinds, however. “Although SMS is the messaging standard common to almost all mobile phones, there are many different MIM apps and they are not compatible—people need to have downloaded the same MIM app to have a conversation,” says Duncan Stewart, director of TMT research for Deloitte Canada, a member firm of DTTL. “The most popular MIM service has hundreds of millions of monthly users; SMS has billions.” MIM cannot be used on a basic mobile phone, he adds. It requires a smartphone, tablet, or mp4 player connected to a mobile data network or a Wi-Fi network. Moreover, some MIM services only work with a single operating system.

“The fact that MIM services are typically available for free or only a small fee goes a long way toward explaining their high popularity and low revenues,” says Lee. Some MIM services are a value-added offering to all users of a manufacturer’s smartphone. For example Apple’s iMessage service is included on every iPhone and there is no charge for using it. Other MIM services charge a nominal amount for a subscription—for example, WhatsApp charges subscribers a dollar a year, but the first year is free and the provider has also waived subsequent year’s fees for some users.

Many MIM services seem to be focused, at least for now, on capturing the largest possible user base, with an eye toward advertising revenue. “Some providers have included virtual goods, payments, or games in their offering, and their revenues are growing fast,” says Stewart. For example, Line, a service popular in Asia, generates about 69 cents per customer each quarter from in-app purchases, advertising, and games. Deloitte estimates that games bought or played on MIM platforms and other virtual goods, such as stickers, will generate revenues exceeding $1 billion in 2014. “This is a significant sum, albeit a fraction of the revenues generated by SMS services,” Stewart adds.

As more MIM services become available and competition increases, it will be harder for MIM providers to charge even small fees for basic messaging. “Many people have several MIM apps on their smartphones, so it’s easy for users to switch providers if they don’t like being charged even $1 per year to use a service,” says Lee. MIM services will need to increase their own advertising investments to raise awareness, which will make profitability more elusive.

Despite losing users to MIM, SMS should continue to offer a dependable revenue stream to mobile operators. “It’s important to emphasize that SMS revenues are not disappearing anytime soon,” says Stewart. SMS’s ability to generate greater revenues may actually be attributable in part to the relative infrequency of its use compared with MIM. “Because many users send fewer text messages, they may be relatively unconcerned about SMS tariffs,” Stewart points out. Operators should also be looking for innovative ways to capture additional revenues from SMS beyond person-to-person messages. For example, “application-to-person” (ATP) messaging is a potentially attractive use of SMS for both operators and their business customers.

“Businesses could use A2P messages to send individuals personalized text alerts, such as information about bank balances, warnings about flight delays, or reminders of a medical appointment,” says Lee.

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The outlook for the mobile messaging market presents a paradox. MIM is the “hot” option attracting increasing numbers of users, but SMS should continue to generate reliable returns at high margins for mobile operators, despite slowing growth. To navigate this complex market landscape, CIOs will need to provide their company’s workforce with mobile services that can accommodate the variety of options demanded by users as their mobile messaging practices evolve.